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Uphill Battle Continues - Downgrade to Reduce
A series of development could affect Mahanagar Gas (MAHGL) earnings: (1) Private CNG pump owners have refused to sign new agreement with MAHGL of 40% lower commission, mainly due to operating income is 31% higher if the same CNG station plot rent out; (2) Slowdown in monthly CNG conversion to 5K from 7K in FY19 led to only 1.5% CNG volume growth in 1HFY20. Further, majority of new CNG vehicles additions are Auto Rikshaws which are the lowest daily CNG consumers, we continue to believe CNG volume growth 3.5%in FY20E/FY21E/FY22E below than company guidance of 6%; (3) MAHGL has secured 0.3mmscmd gas from R- cluster field at 8.4% slope to Brent price, we believe this is not cheaper gas for PNG industrials customers in soft spot LNG price outlook and (4) In 3QFY20, We expect fall in MAHGL’s EBITDA/scm to ~Rs9/ scm from Rs 9.9/scm in 2QFY20. Hence, this implies limited CNG volume growth potential. We downgrade our recommendation on the stock to REDUCE from HOLD with an unrevised DCF-based Target Price of Rs956.
Rent out a CNG Station More Profitable than CNG BZ at 40% Lower Commissions
34 Private CNG pump owners have refused to sign new agreement with MAHGL of 40% reduced commission. MAHGL is deciding to reduce CNG commissions of 34 private CNG stations, likely to face closure by March 2020 if no new agreement (News). Our calculation suggests, instead of continuing with lower trade commissions on CNG sale business, private pump owner can rent out CNG station land and earn 31% EBITDA. (See Exhibit 4). MAHGL has 244 CNG stations in Mumbai, Thane & Raigad region, selling CNG at rate of 2.2 mmscmd. If 34 stations stop operations could impact 14% of total CNG volume on temporary basis. Any strike/closure of CNG pumps could hit overall volume growth. Scenario (1) 5 days strike of private CNG pump owners can drag maximum CNG volume sales by 0.54% and EPS by 0.64% in 4QFY20, (2) If no agreement between private CNG pump owners and MAHGL then impact of 10% on CNG sales volume & 12% on EPS for 3 months (4QFY20).
CNG Vehicle Addition @ of 5K/month; Majority of Auto Rikshaws only
A mere 1.5% CNG volume growth in 1HFY20 is mostly due to overall slowdown in monthly CNG vehicle addition to 5k from 7K in FY19. While the composition of CNG vehicle addition is been changed in last 6 months, our calculation suggest, monthly Auto Rikshaws addition continued to remain same (~4k – which consume lowest volume on daily basis) while the zero registration of Kaali-peelis at Mumbai RTO, other heavy CNG vehicle number is contracted and share of App cab and private cars are falling in overall CNG vehicle composition. Slowdown in overall auto sales numbers have also impacted to CNG volume growth. We maintain our CNG volume growth 3.5%/3.5% for FY20E/FY21E based 1) Delay in BEST CNG bus addition 2) No sign of improvement in share of CNG App cabs/taxi additions (which consume higher CNG on daily basis).
Gas Sourcing at 8.4% Slope not Cheap Compared to Soft Spot LNG Price
MAHGL has bagged gas of 0.3mmscmd in latest auction, new gas production to start from R- cluster field in April 2020. Gas supply from R- cluster field is priced at ~8.4% slope to last 3 months Avg. Brent prices. Mahanagar gas is oblique to take 80% of bagged quantity in a quarter on a “take or pay” clause. Based on our calculations for 2QFY20, R -cluster gas price at (~$5.1/mmbtu) ~8.4% slope to crude price is not cheaper compared to spot LNG price of $4.7/ mmbtu (7.2% slope to crude). Brent Crude forward prices are in backwardation from $67/bbl to $63/bbl (See exhibit xx) for period of CY2020, even at price of crude $63/bbl, R-cluster gas price would be $5.3/mmbtu is not cheaper compared to forward spot LNG prices are below $5/ mmbtu (see Exhibit 14&15). Further, MAHGL has to incur higher gas transmission cost of ~ $1/ mmbtu (Rs71.6/mmbtu) on East -West pipeline compared to ~$0.5/mmbtu (Rs37.7/mmbtu) on Dahej -Panvel pipeline. On net basis, cost of gas (R- cluster) will be higher for PNG industrials and less competitive with alternate fuels. We believe it would be opportunity loss for MAHGL’s gross margin improvement. If cost of gas is cheaper by $1/mmbtu then overall EBITDA/scm likely to improve by Rs0.3/scm. In long term, cheap source of gas/LNG supply will be the major deciding factor to expand PNG industrial segment.
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